Ashford University failed to return more than a million dollars in federal aid awarded to students who later withdrew, and may have violated a federal ban on incentive compensation for college recruiters, an audit released on Monday by the Education Department’s Office of Inspector General says.

According to the audit, Ashford, a for-profit institution in Iowa, rewarded recruiters based on their success in securing enrollments and improperly retained $29,000 in federal funds awarded to 38 out of the 85 students included in the inspector general’s review. The inspector general extrapolated from that sample to conclude that the university improperly retained at least $1.1-million during the 2006-7 audit period.

Note that the Audit period was from five years ago. In the last year Congress has been subjecting for-profit institutions to a much higher level of scrutiny and threatening more strict regulation. So, one would hope that practices have changed for the better. This incident does highlight one of the key problems for for-profit universities; the often conflicting goals of maximizing shareholder profits and delivering a quality education experience.

In a post from several years ago I talked about how these competing interests can cripple the institution. On the one hand, Bridgepoint Education (the parent company of Ashford, as well as the University of the Rockies in Colorado is a publicly traded company. Bridgepoint does not issue stock dividends. This subjects it to the expectations that apply in such a case; shareholders will want to see consistent quarterly growth in perpetuity or at least enough constant upward movement that the stock can be arbitraged.

On the other hand, the structural limitations of providing a quality education both for online and physical campus students has a lot of constraints that traditional businesses don’t always have. The need for physical infrastructure for the campus, the student-teacher ratio for both online and physical students and the salaries required for quality instruction all to some extent or another are going to limit the traditional search for efficiency that many businesses use to evolve and maintain profitability.

At some point for example the student-teacher ratio reaches a point where the quality of the product (instruction) suffers. This can lead to student dissatisfaction and students leaving the college, which impacts profits. Therefore, there is some point where no further efficiencies can be made and the faculty cost per student is pretty much set in stone.

So a business model that says the value of the company is based on its ability to grow forever, offering every greater profits and therefore a constantly rising stock price might not be appropriate to this sort of business. An alternative exists wherein the business focuses on competing on quality and to some extent on price. In this model profits remain relatively steady or grow slowly but consistently along with the organic growth of the business (as it adds more institutions for example). The company then goes to a dividend-based shareholder value model. This encourages investors to buy and hold the stock as a long-term investment.

Take for example Johnson & Johnson. Here is a century-old company that, while it consistently innovates, makes pretty basic, mundane things: cleaning products. A look at the ten-year trend for JNJ shows that it has traded consistently in a range between $41 and $71 (the lows include very low lows in economic downturns). The 52 week range is $56-$66 and that is pretty consistent with the 10 year rolling average. The current dividend yield is about $3.55 per share. That’s a nice, safe stock to own in your portfolio. The world needs nice, safe investments as much (or more) than it needs spectacular growth stocks.

It seems to me that a company that is in the education business would want to actively cultivate a staid, conservative not-going-anywhere-anytime-soon image.

— Total student enrollment increased 79.7% year-over-year to 54,894 at
the
end of the quarter.
— Revenue increased 111.3% to $127.4 million from $60.3 million for the
same period in 2008.
— Operating income increased 233.2% to $38.8 million from $11.7 million
for the same period in 2008.
— Net income was $22.4 million, an increase of 155.5% compared with net
income of $8.8 million for the same period in 2008.
— Fully diluted earnings per common share increased 428.6% to $0.37 from
$0.07 for the same period in 2008.

BPIshares are trading at $15.80 today, still down from the $18.60 they were trading at prior to the Department of Education investigation news broke. But it seems the company fundamentals are encouraging investors.

“These scholarship programs benefit top tier students who have achieved high levels of academic excellence,” said Jane McAuliffe, president of Ashford University and senior vice president/chief academic officer of Bridgepoint Education.

“At Ashford University, we believe that hard working students who have earned good grades throughout their education deserve the opportunity to embark upon a high-quality higher education. We’re rewarding the best and brightest students who have demonstrated their capability and commitment to learning. It’s an honor to support these future leaders, especially in this difficult economic environment,” McAuliffe said.

Three scholarship levels are being offered. The President’s Scholarship covers 100 percent tuition (currently $15,720) for applicants with a grade-point average of 3.50 and above. The Provost’s Scholarship covers $12,500 toward tuition for applicants with a grade-point average between 3.25 and 3.49. The Dean’s Scholarship covers $10,000 toward tuition for applicants with a grade-point average between 3.00 and 3.24.
A student’s grade-point average is the only qualification for these scholarship awards. All of the scholarships will be renewable if the student maintains minimum grade-point averages as outlined in the President’s, Provost’s, or Dean’s Scholarship criteria.

According to Renaissance Capital, Bridgepoint’s secondary share offering will go ahead this week. That will be an 11 million share, all-insider deal.

Instant payback. Here is what’s going on with Ashford/Bridgepoint this week. First the Good News:

Respected business and investing site Seeking Alpha lists Bridgepoint Education as its number one IPO of 2009 so far.

Since turning its first yearly profit in 2007, this provider of online education to over 30K students has been on a tear. In 2008, its EPS rocketed to .51/share vs just .06/share the year before and here in 2009 it’s expected to double to a little over a buck a share. Sales growth has been equally impressive with quarter over quarter growth in the last 4 quarters of 183%, 175%, 163% and 127%. Technically, it’s in the process of carving out a new base after more than doubling from opening

Now the Bad News:

Congress is contemplating hearings regarding for-profit universities following a Government Accounting Office report that indicates a much higher default rates of federal student loans among the for-profits.

Rep. George Miller, D-Calif., who heads the House Education Committee, said Monday after the market closed that a Government Accountability Office report on so-called proprietary schools is “extremely troubling and warrant(s) further examination by Congress.”

The GAO report, released earlier this week, found loan default rates of students who receive Title IV money to attend proprietary schools exceed the default rates of students who receive federal money to attend conventional college-level institutions.

The report found that many proprietary schools admitted unqualified students who had a greater tendency than other students to drop out, let students stay enrolled despite a lack of academic progress and also misrepresented themselves to prospective students.

I have looked over the GAO report. The profile of the student body at for-profit schools skews much more towards the non-traditional student. That is, over 25 and financially independent (not getting funds from mom and dad). This is the underserved market that these schools are targeting, so this should not be surprising. For-profits offer Internet-based education that is suited for the needs of this segment.

It should also not be surprising that this segment of students fails to complete the coursework at a higher level than traditional college students. When you are probably already struggling a bit to make ends meet it is going to be comparably much more difficult to successfully complete a two or three year commitment to an online education. Life will get in the way.

Here is a chart from the GAO report:

With that said it is also pretty clear that the default rate differences are pretty startling. With more and more students looking towards the for-profit option those schools need to do a better job of helping them be successful.

The tension here is between the government’s fiduciary duty to the taxpayers who guarantee the student loan program and companies fiduciary duty to deliver profits to the shareholders. The government needs to see to it that federal student loans a) go to students who can succeed and, b) that those loans are paid back so that the system can remain solvent. The universities don’t necessarily care if those loans are paid back. Once a tuition bill is paid, the money is in the company account. The loan company is on the hook.

You couldn’t ask for a clearer example of the need for government oversight of business than this. Without it, there would be very little in the way of incentive — other than a desire to have good student outcomes for competitive reasons, and that can be fudged easily — to ensure that their students succeed and go on to get good jobs and pay back the loans.

BPI closed yesterday at $16.65 a share, down 55 cents.

San Diego-based Bridgepoint Education, the for-profit operator of online college programs and two universities, was among Wall Street’s top losers yesterday after it announced that it might face fines and penalties for possibly misusing federal student aid.

he U.S. Department of Education’s inspector general opened an audit last year of Bridgepoint’s Ashford University, a former Catholic teachers college in Iowa with an enrollment of about 3,800. The company acknowledged that it could face fines and “corrective action” for its handling of federal student loans and grants. A draft audit report is expected within 30 days, and Bridgepoint will have a chance to respond.

The inspector general’s findings could cover Bridgepoint’s compensation of enrollment officers, returns and disbursement of student aid funds and documentation of students’ leaves of absence, the company said. Ashford University got 87 percent of its revenue from federal financial aid in 2008, according to a company filing.

According to Bridgepoint’s most recent quarterly report, it has faced several issues in recent months in operating its college programs.

When its administration of federal student aid at Ashford fell below federal guidelines, Bridgepoint had to post a $12.1 million letter of credit to guarantee that it would pay the penalties if the standards were not improved. The University of the Rockies had similar issues, requiring a separate, $700,000 letter of credit.

At the end of 2007, Ashford blamed “human error” for missing deadlines to return student loans on time to the U.S. Treasury, but an additional letter of credit was not required.

“Although the company has taken steps to reduce late refunds, it cannot ensure that such steps will be sufficient to address this issue,” Bridgepoint’s second-quarter report said.

In addition, the company settled a shareholder dispute for $11.1 million in March. The issues related to stock options and financing in 2005.

This story was also carried on the Associated Press, Bloomberg and Reuters wires. The story was notable because for Friday, Bridgepoint was in the top ten percentage point losers in that day’s trading, which usually will trigger a blurb of some sort in the financial press even for smaller companies. The stock has recovered slightly as of this writing is trading at $16.20/share.

Interesting how the local print press has missed both notable stories regarding on of the regions’s largest employers/taxpayers this year, that of the BIP initial stock offering and this latest. All of which can be found with a simple Google news alert. I haven’t even looked to see what ADM and Lyondell/Basel are up to.

But, there had to be a but.

Ashford’s parent company, Bridgepoint Education, Inc, had its initial public offering on the New York Stock Exchange on April 15. (Ticker: BPI) . This is an important development for the community but there was no coverage of this by the local press.

Several years ago I mused on whether for-profit, online universities were a sustainable business. The crux of my argument was that there is probably an optimal enrollment size where student achievement, satisfaction and retention are in a good equilibrium with profits. Trying to scale to large will lead to a drop in quality of education product, lessening student satisfaction and retention and thus leading to a nasty churn rate and problems with student loans. A conservative business plan would be to strive for an enrollment level close to that profit-performance equilibrium and then use process improvement to wring efficiency and higher profits as well as modest enrollment growth. This would allow the company to pay consistent stock dividends over long periods and encourage shareholders to hold onto BPI stock long-term.

The fact that Bridgepoint made no secret of its plans to take the company public just deepened my worries. We still live with an investment model that values constant growth in stock value over consistent profits and dividends The pressures on Bridgepint management for quarterly and annual performance stock price gains will drive the company to scale up and up.

Similar pressures led the University of Phoenix — from which many of BPI’s founding members begain their careers in for-profit education — to pay a $9.8 milion fine for fraudulent recruiting practices to the US Department of Education in 2004.

This was all in the back of my mind then when I and other members of the business community took the guided tour of the call center two Wednesdays ago. The tour was conducted by two of the human resources and public relations staff at Ashford. Among the questions asked by another tour member one was rather pointed and to the point: What is your student retention and graduation rate?

I have to paraphrase the reply because I was not taking notes but I remember it well for its shocking lack of knowledge, candor or both. “We are currently calculating those figures, so I don’t have them for you. But they are good.”

My personal opinion is that unless the person conducting the guide was tremendously uninformed about her company that the answer had to be a bald-faced lie. There is just no way not to have those figures, even if they are not the most current, in one’s mind. They are the meat-and-potatoes, the be-all and end-all of the business. It simply wasn’t credible that she simply wouldn’t know. Later I discussed this with a couple of members of the tour group and they expressed a similar opinion.

The obvious conclusion — other than the speaker didn’t know what she was talking about, an option I’m certainly not completely discounting either — is that the company doesn’t want the locals to know.

None if this should be construed to think that I think there is a grand conspiracy going on. Only this. The citizens of Clinton should keep it firmly in their minds that Ashford University is no longer our beloved old Mount St. Claire/Franciscan College. It is run by a publicly traded company headquartered half a continent away in San Diego, CA. It will do whatever it thinks necessary to maximize shareholder value. That is its one and only reason for being. To the extent that Ashford University is a good corporate citizen in this area is a function of the company’s financial success and growth strategy. No more, no less.